2. Briguglio lino

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2. Briguglio lino

  1. 1. ECONOMIC VULNERABILITY AND RESILIENCE WITH SPECIAL REFERENCE TO SMALL ISLAND DEVELOPING STATESPrepared byLINO BRIGUGLIO,Small States Network for Economic DevelopmentRegional Policy Briefing No. 7BUILDING RESILIENCE IN SMALL ISLAND ECONOMIES:FROM VULNERABILITIES TO OPPORTUNITIESHotel Victoria, Pointe aux Piments, Mauritius, 23-24 April 2012 1
  2. 2. LayoutThe presentation is organised as follows: Economic Vulnerability Economic Resilience Juxtaposing economic vulnerability and resilience Results of the resilience index and country categorisation Policy Implications and concluding considerations 2
  3. 3. ECONOMIC VULNERABILITY 3
  4. 4. Meaning of Economic VulnerabilityEconomic vulnerability refers to inherent proneness of aneconomy to harmful exogenous shocks.In the case of small states, such vulnerability arises fromthe fact that the economies of these states are, to a largeextent, shaped by forces outside their control. 4
  5. 5. Studies on Economic VulnerabilityStudies on economic vulnerability so far have focused onmeasuring the phenomenon by proxying exposure to shocks.The so-called UNCDP index, used for the graduation fromLDC status also attempts to factor-in structural factors.What follows is based on the Economic Vulnerability Indexdeveloped by the University of Malta. 5
  6. 6. Studies on Economic VulnerabilityThe research carried out by the University of Malta focuses oninherent (as against policy induced) factors that lead toexposure to external shocks, and is measured by: Openness to international trade Export concentration Dependence on strategic imports.The studies carried out by the University of Malta (Briguglio,1995; Briguglio and Galea, 2003) conclude, like many otherstudies, that small states tend to be more economicallyvulnerable than other group of countries 6
  7. 7. What causes Economic Vulnerability? Trade openness, measured by Exports + Imports/2 as aratio of GDP, arises because (a) small states import a highproportion of their final expenditure due to limited naturalresource endowments and (b) export a high proportion of theiroutput mainly due to the limited size of the domestic marketand to meet import expenditure. Export concentration (i.e. reliance on a few items ofexports of goods and services) is relatively high in small statesbecause of their limited diversification possibilities. This leadsto the risk of having too many eggs in one basket. High dependence on strategic imports (food, fuel andindustrial supplies) leads to high exposure to shocks. Theseimports are characterised by low price and income elasticity ofdemand and therefore have a high impact on small stateswhen the prices of these imports change. 7
  8. 8. Success In Spite of and Not because ofEconomic Vulnerability► In spite of their economic vulnerability, many small states manage to generate a relatively high GDP per capita, when compared to other developing countries► This has been called the ‘Singapore Paradox’► One can explain this paradox by juxtaposing economic vulnerability with economic resilience. 8
  9. 9. ECONOMIC RESILIENCE 9
  10. 10. Meaning of Economic ResilienceEconomic resilience refers to the extent to which an economycan withstand or bounce back from the negative effects ofexternal shocks.Economic resilience (resilire) refers to:► the ability of an economy to recover quickly following adverse shocks: shock counteraction► The ability of an economy to withstand shocks: shock absorption 10
  11. 11. Economic Resilience IndexThe University of Malta has also undertaken research toexplain why, in spite of their vulnerability, some small stateslike Malta, manage to attain economic success.The policy framework that was investigated towards thisend was labelled “resilience building”. The measurement ofsuch policies was labelled “resilience index”. 11
  12. 12. What helps to Build Economic Resilience?A framework for the measurement of economic resiliencewas developed by Briguglio, Cordina, Vella and Farrugia(2006; 2009) who constructed a resilience index,consistingof the following components:► macroeconomic stability;► market efficiency;► good governance; and► social development. 12
  13. 13. Macroeconomic stabilityMacroeconomic stability relates to the interaction betweenan economy’s aggregate demand and aggregate supply. Ifaggregate expenditure in an economy moves in equilibriumwith aggregate supply, the economy would becharacterised by internal balance, as manifested in asustainable fiscal position, low price inflation and anunemployment rate close to the natural rate, as well as byexternal balance, as reflected in the international currentaccount position or by the level of external debt.These can be all considered to be variables which arehighly influenced by economic policy and which could actas good indicators of an economy’s resilience in facingadverse shocks. 13
  14. 14. Macroeconomic stabilityThe macroeconomic stability component of the resilienceindex proposed in this study consists of three variables,namely the fiscal deficit to GDP ratio; the sum of the unemployment and inflation rates; and the external debt to GDP ratio.Good performance in these variables indicate that thecountry will have room for manoeuvre when being affectedby shocks.The variables are available for a reasonably wide set ofcountries spread over a spectrum of stages ofdevelopment, size and geographical characteristics. 14
  15. 15. Market efficiencyThe science of economics views markets and their efficientoperation through the price mechanism as the best way toallocate resources in the economy. If markets adjust rapidlyto achieve equilibrium, following an external shock, the riskof being negatively affected by such a shock will be lowerthan if market disequilbria tend to persist. Indeed, if withvery slow or non-existent market adjustment, resources willnot be efficiently allocated in the economy, resulting inwelfare costs, manifested, for instance, in unemployedresources and waste or shortages in the goods markets.These considerations have important implications forresilience of the shock absorbing type. 15
  16. 16. Market efficiencyThe market efficiency indicators used related to: the financial market. These indicators assess the extentto which (a) the banking industry is dominated by privatefirms; (b) foreign banks are permitted to compete in themarket; (c) credit is supplied to the private sector; and (d)interest rates are in line with the workings of the market. the labour market. Here the indicators relate to undulyhigh unemployment benefits (which could undermine theincentive to accept employment), dismissal regulations,minimum wage impositions, centralised wage setting,extensions of union contracts to non-participating partiesand conscription. Bureaucratic control of business activities. This indicatormeasures the extent of government interference which isalso thought to inhibit market efficiency. 16
  17. 17. Good GovernanceGood governance is essential for an economic system tofunction properly and hence to be resilient. Governancerelates to issues such as rule of law and property rights.Without mechanisms of this kind in place, it would berelatively easy for adverse shocks to result in economic andsocial chaos and unrest. Hence the effects of vulnerabilitywould be exacerbated. On the other hand, goodgovernance can strengthen an economy’s resilience. 17
  18. 18. Good GovernanceThe Economic Freedom of the World Index (Gw has acomponent which focuses on legal structure and security ofproperty rights. This is considered to be useful in thecontext of the present exercise in deriving an index of goodgovernance. The component covers five sub-components,namely: judicial independence; impartiality of courts; (c) the protection of intellectual property rights; military interference in the rule of law; and political system and the integrity of the legal system. 18
  19. 19. Good GovernanceAn alternative governance index is presented by the WorldBank (Kaufmann et al., 2006). A Pearson correlation test ofthe World Bank governance indicators and the EconomicFreedom of the Worlds "legal structure and security ofproperty rights" component yielded a value of 0.92. Thus,both indices are likely to be measuring a similarphenomenon. In fact when the Kaufmann Index was usedin the compilation of the resilience index the ranking ofcountries only changed marginally. 19
  20. 20. Social DevelopmentSocial development is another essential component ofeconomic resilience. This factor indicates the extent towhich relations within a society are properly developed,enabling an effective functioning of the economic apparatuswithout the hindrance of civil unrest. Social developmentcan also indicate the extent to which effective socialdialogue takes place in an economy, which would in turnenable collaborative approaches towards the undertakingof corrective measures in the face of adverse shocks. 20
  21. 21. Social DevelopmentSocial development can be measured in a number of ways.The variables chosen for the resilience index weretheeducation and health indicators utilised to construct theUNDP Human Development Index. Educational advancement, measured by the adult literacyrate and school enrolment ratios, is considered to be agood indicator of social development. In addition, animproved standard of education could be indicative of animproved ability to cohere in the face of external shocks—acondition conducive to economic resilience. Life expectancy at birth is considered to be suitable formeasuring the health aspects in society. This in turn islikely to be related to medical facilities, housing and degreeof proneness to accident or risk of injury. 21
  22. 22. JUXTAPOSINGVULNERABILITY AND RESILIENCE 22
  23. 23. Juxtaposing Vulnerability and ResilienceMethodological frameworkBy distinguishing between inherent economic vulnerabilityand nurtured economic resilience, it is possible to create amethodological framework for assessing the risk of beingaffected by external shocks, as shown in the following figure.The figure shows that risk has two elements:► the first is associated with the inherent vulnerability - conditions of the country that expose it shocks, and► the second is associated with good economic governance► the risk of being adversely affected by the shock is therefore the combination of the two elements. 23
  24. 24. Juxtaposing Vulnerability and Resilience (cont)Risk of being harmed by external shocks 24
  25. 25. FOUR COUNTRY SCENARIOSOn the basis of this methodology, one can propose 4scenarios into which countries may be placed according totheir vulnerability and resilience characteristics. Thesescenarios are termed “best-case”, “worst-case”, “self-made”, and “prodigal-son”.► Countries classified as “self-made” are those that takesteps to mitigate their inherent vulnerability by building theireconomic resilience, thereby reducing the risks associatedwith exposure to shocks.► Countries falling within the “prodigal-son” scenario arethose with a relatively low degree of inherent economicvulnerability but which adopt policies that expose them tothe adverse effects of exogenous shocks. 25
  26. 26. FOUR COUNTRY SCENARIOS (cont)► The “best-case” scenario applies to countries that are not inherently highly vulnerable and which at the same time adopt resilience-building policies.► Conversely, the “worst-case” scenario refers to countries that are inherently highly vulnerable but make matters worse by adopting policies that exacerbate the negative effects of their vulnerability. 26
  27. 27. FOUR COUNTRY SCENARIOS (cont)► These four scenarios or cases are depicted in the following figure, where the axes measure inherent economic vulnerability and nurtured resilience, respectively.In this scheme the best situation in economic terms falls in quadrant IV.► The vulnerable small island states that have adopted resilience-building policies are likely to fall in quadrant II. 27
  28. 28. FOUR COUNTRY SCENARIOS (cont)Vulnerability Index Resilience Index 28
  29. 29. RESULTS OF THERESILIENCE INDEX ANDCOUNTRYCATEGORISATION 29
  30. 30. Results of the V&R JuxtapositionResults produced by Briguglio et al (2006) Malta Jamaica Singapore Trinidad & Tobago 30 Resilience
  31. 31. Results of the V&R Juxtaposition (cont) The overall tendencies that emerged from the study: ► countries which fall in the “best-case” quadrant are mostly the large developed countries; ► countries which fall in the “self-made” quadrant include a number of small states with a high vulnerability score, including Malta;Vulnerability ► countries which fall in the “prodigal-son” quadrant include mostly large third world countries; and ► countries which fall in the “worst-case” quadrant include a few vulnerable small countries with weak economic governance. 31 Resilience
  32. 32. CONCLUDINGCONSIDERATIONS 32
  33. 33. Concluding ConsiderationsMain Implications► The main implication of this presentation is that vulnerability has negative connotations on economic development due to the effects of negative external shocks.► On the other hand, resilience building has a positive influence on economic development as it helps a country to withstand or absorb these shocks.► Also, economic resilience building is associated with good economic governance.► Many small states succeed economically in spite of the small size constraints, due to good economic governance. 33
  34. 34. Concluding Considerations(cont)Usefulness for policy► The juxtaposition of economic vulnerability and resilience permits an assessment of the reasons behind the economic success or failure of small vulnerable countries.► This approach was utilised in a recent ESCAP study (ESCAP, ABD, UNDP, 2010).► A number of policy implications emerge from this presentation, but the most important one is the small states should give major importance to resilience building by: - reducing instability, - improving the workings of the market, - enhancing political governance, and - promoting social development. 34
  35. 35. Concluding Considerations(cont)Usefulness for country profiling► For the purposes of policy formulation and implementation, it is useful to undertake in-depth investigation of issues within the specific context of the country and its circumstances► This was done by the Commonwealth Secretariat in collaboration with the University of Malta through profiling exercises. These exercises have enabled a number of small island states to carry out a self-examination in order to identify gaps in their policy framework. Visit: http://publications.thecommonwealth.org/Uploaded/Products/ 35
  36. 36. REFERENCES► Briguglio, L. (1995). “Small Island States and their Economic Vulnerabilities,” World Development, Vol.23 (9): 1615-1632.► Briguglio, L. Cordina, C. Farrugia, N. and Vella, S. (2006). “Conceptualizing and Measuring Economic Resilience.” In Building the Economic Resilience of Small States, Edited by L. Briguglio, C. Cordina and E.J. Kisanga, Malta: Islands and Small States Institute and London: Commonwealth Secretariat.► Briguglio, L. Cordina, C. Farrugia, N. and Vella, S. (2009). “Economic Vulnerability and Resilience: Concepts and Measurements.” Oxford Development Studies,Vol. 37 (3): 229- 247► Briguglio, L. and Galea, W. “Updating the Economic Vulnerability Index.” Occasional Papers on Islands and Small States, No. 2003-4. Malta: Islands and Small States Institute. (2003).► Briguglio, L., Cordina, C. Vella, S. and Vigilance, C. (2010). Profiling Economic Vulnerability and Resilience: A Small States Manual. London: Commonwealth Secretariat.► ESCAP, UNDP, ADB (2010). Achieving the Millennium Development Goals in an Era of Global Uncertainty. Asia-Pacific Regional Report 2009/10 (Annex 3) 36
  37. 37. THANK YOU FOR YOUR ATTENTION 37

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